In the new issue of Regulation, economist Pierre Lemieux argues that the recent oil price decline is at least partly the result of increased supply from the extraction of shale oil. The increased supply allows the economy to produce more goods, which benefits some people, if not all of them. Thus, contrary to some commentary in the press, cheaper oil prices cannot harm the economy as a whole.

Two long wars, chronic deficits, the financial crisis, the costly drug war, the growth of executive power under Presidents Bush and Obama, and the revelations about NSA abuses, have given rise to a growing libertarian movement in our country – with a greater focus on individual liberty and less government power. David Boaz’s newly released The Libertarian Mind is a comprehensive guide to the history, philosophy, and growth of the libertarian movement, with incisive analyses of today’s most pressing issues and policies.

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Archives: 05/2012

Why the big concern about the Common Core? For many it’s about the quality of the standards, which is a topic well worth delving into. But the real problem is that – continued protestations of supporters notwithstanding – adopting the standards has been anything but truly voluntary, and they are very likely to lead to complete federal control of education.

First, the sham voluntarism of today. Did your state want federal Race to the Top money? It had to adopt the Common Core to be fully competitive. Did it want out of the irrational, failed, No Child Left Behind Act? It had to have signed on to the Common Core to have a decent chance. Oh, and the tests that will go with the Common Core? The consortia creating them were selected by the federal government, which is also paying the bills.

And here’s something interesting: States didn’t technically have to sign on to NCLB, either. They “volunteered” to take federal dough and got NCLB with it. So why don’t you hear many people crowing that adopting NCLB was voluntary?

Because they know that it’s almost impossible for state policymakers to turn down hundreds-of-millions of federal dollars. It looks like a whole lot of money to state citizens, and those citizens had no choice about paying the federal taxes from which the money came. So neither signing on to NCLB nor the Common Core were truly voluntary, and the only reason the nation has fallen slightly short of Common Core unanimity is that, unlike NCLB, neither Race to the Top money nor NCLB waivers were guaranteed for every state. Nonetheless, most found it impossible not to take a gamble.

That said, the biggest threat is down the line. With almost all states having adopted the Core, there’s a huge chance that when Congress reauthorizes NCLB the Common Core – and the federal tests to go with it – will become the backbone of federal accountability, with schools rewarded or punished based on how they score on the tests. The rationale many policymakers will offer is easy to anticipate: “States have already signed on to shared standards, so it makes little sense not to base accountability on them.” Classic slippery slope.

From the vantage point of Common Core supporters, that is actually the only outcome that makes sense. As Fordham Institute folks have complained on numerous occasions, the vast majority of states will not on their own raise standards and maintain strict accountability. But if states won’t do it, the federal government – their boss – must.

But even if Common Core supporters achieve that which is the logical end of national standards and testing – federal control – it almost certainly won’t give them the educational outcomes they want.

Ultimately, the groups that have the most influence over any government policy are those most directly affected by it – they are the most motivated to be politically involved – and in education that’s the teachers and administrators whose very livelihoods come from the system. And because they are normal human brings – no better nor worse than the rest of us – what they ideally want, and fight for, is as little accountability to others as possible. That’s why so few states have ever had much success with standards and testing, and why it’s irrational to think that Washington will do any better. Indeed, at least to a limited extent states compete with each other for residents and businesses – Washington doesn’t face even that minimal upward pressure.

So what will the Common Core most likely get us? Red-tape driven federal control without rigorous standards and testing. It will also move us farther from the reform that actually makes sense: School choice for all, which would overcome disproportionate political power by forcing educators to respond to parents. And that’s not all it would do. It would also give educators new freedom to employ different pedagogies and curricula; enable children with diverse interests and needs to link up with teachers specializing in them; and unleash crucial competition and innovation. It would, basically, stop ignoring the fundamental realities that all children are different, and no one actually knows what are the ultimate, “best” curricula.

Unfortunately, not only are we moving away from what we need, we’re stuck fighting over what really isn’t even a question: Adopting the Common Core hasn’t been truly voluntary at all.

States defaulting on pension obligations through bankruptcy and/or action by legislatures. Some de facto defaults will likely be to promise payment at age 90 or whatever.

National governments, including the US, also likely defaulting on everything, gov’t bonds and so-called “entitlements.”

So, pensioners, city, state and national get at least a huge haircut on what they expected and Medicare and Medicaid just aren’t viable over time.

What are the economic implications and possible other implications?

Here’s my response:

Many US states are facing pension fund insolvency and will have to impose heavier burdens either on taxpayers, employees, or retirees, or some combination thereof. There is a precedent, although not a direct one, for a federal bailout of state and local governments: The Emergency Relief and Construction Act of 1932 provided $300 million to be lent to the states (and onward to cities and counties) for relief. Everybody understood that these loans probably would never be repaid and, in fact, they were eventually written off. This statute was the first breach of the federal “relief dam” – one that burst after FDR took office in March 1933. Despite it, three states-Arkansas, Louisiana, and South Carolina-defaulted on their debts. By the end of 1933, approximately 1,300 local governments also had defaulted and many other state and local governments verged on default.

Recently, Ben Bernanke has ruled out a bailout of states via the Fed (who believes him, given what he’s already done?) and Eric Cantor recently wrote that the states have the tools to deal with their fiscal challenges, including renegotiating agreements with public-sector unions. In his opinion, there is no reason for federal involvement in state government fiscal problems, but how policymakers will respond when the chips are down (or there’s “blood on the streets”) is anyone’s guess. Some states are in pension trouble because they assumed highly risky investment strategies that failed when asset values sank during the 2001 and 2008-09 recessions. One favorable element for some states - Arizona, Utah, Texas, NM, etc. – is their favorable demographics that could help them to slowly improve their pension and fiscal conditions.

At the federal level, the default must also occur through a “renegotiation” of entitlement promises. The Medicare actuaries have clearly indicated that the so-called Medicare fix enacted through ObamaCare is untenable. So, whether or not ObamaCare is repealed, we’re still at square one and a renegotiation must happen soon. The problem is that we always wait for the people to deliver a “clear verdict” through elections, and elections usually don’t. Leadership on this issue is sorely needed but is not forthcoming for understandable reasons. The political game is to push the adjustment costs out into the future – but eventually it will imply significantly reduced living standards for future generations. How that will come about – whether through a crisis as in Greece and Spain, or through a gradual erosion of living standards is difficult to say. The inevitability of one or the other is not in doubt. All we could say is that the probability of a resolution through a violent crisis increases the longer we continue to push the costs out.

I’m placing a high probability on the dissolution of the Euro by the end of this year. With the election results in France, Greece, and Germany, the debt roll-over requirements that Greece, Spain and Italy are facing, and the impossibility of external sources of credible “bailouts” I don’t see how it can be any other way. Some people wonder whether the periphery states will opt out first or whether Germany and stronger northern states will move first to kick them out. There are no formal exit strategies included in the European Stability and Growth Pact. I think, though, that it will be the former – the southern countries are facing austerity with, or chaos without, the Euro and now the perceived difference between the two is not very large.

To answer the last question “And then what?” I would simply say that the developed nations will all be poorer – have lower living standards, more unemployment, less growth, etc, until the boomers pass away. I predict as much in my book that examines the implications of demographic and economic trends in developed nations (it does not deal with business cycle related events). Future generations will have to re-think the state-citizen relationships – a process that we can influence.

In the last six months there has been a wave of countrywide attacks on offices of Equitalia, the agency which handles tax collection, with the most recent on Saturday night when a branch was hit with two petrol bombs.Staff have also expressed fears over their personal safety with increasing numbers calling in sick and with one unidentified employee telling Italian TV: “I have told my son not to say where I work or tell anyone what I do for a living.”

As much as I despise high taxes, I don’t think petrol bombs are the answer. But I am glad that at least some of the bureaucrats feels shame about their jobs.

Not surprisingly, the political elite wants people to be deferential to predatory government.

Annamaria Cancellieri, the interior minister, said she was considering calling in the army in a bid to quell the rising social tensions.“There have been several attacks on the offices of Equitalia in recent weeks. I want to remind people that attacking Equitalia is the equivalent of attacking the State,” she said in an interview with La Repubblica newspaper.

Here’s some advice for Ms. Cancellieri: Maybe people will be less likely to attack “the State” if “the State” stops attacking the people.

But don’t expect that to happen. The Prime Minister also demands obedience to “the State” and there’s rhetoric about “paying taxes is a duty” from other high-level government officials.

Saturday night’s attack took place on the Equitalia office in Livorno and the front of the building was left severely damaged by fire after the bombs exploded. The phrases “Thieves” and “Death to Equitalia” were sprayed onto outside walls. It came just 24 hours after more than 200 people had been involved in running battles with police outside a branch in Naples which left a dozen protesters and officers hurt. …There has also been a striking increase in suicides with people leaving notes directly blaming Equitalia and tax demands. Paola Severino, the Justice minister, said: “The economic situation has produced unease but paying taxes is a duty. On one side there is anger and the problem of paying when the resources are scare but on the other side is the fact that they must be paid.” …Mr Monti has vowed to press on even harder this year to recover the lost money. He is due to have a meeting with Equitalia chief Attilio Befera to discuss the situation and he has already said: “We are not going to take a step back, there will be no giving in to those who have declared was against the revenue and therefore the State. We will not be intimidated.”

If Italy’s political class wants to improve tax compliance, they should listen to the IMF and academic economists, both of whom point out that lower tax rates reduce incentives for evasion and avoidance.

Investment giant J.P. Morgan made a bad trade that cost its owners $2 billion. The responsible parties are losing their jobs. Yahoo’s CEO evidently misled people about his qualifications. As a result, he lost his job.

If you want to know why these are market successes, consider: Medicare and Medicaid lose at least 35 times as much per year to fraud and other improper payments, and Medicare wastes even more on medical care that does nothing to make patients healthier or happier. This happens year after year after year.

Now ask yourself: when was the last time someone got fired over those losses? And yet the politicians’ first reaction to the J.P. Morgan trade was greater oversight by the political system, which tolerates much greater losses than the market system that is currently disciplining J.P. Morgan.

Here’s hoping the Yahoo incident inspires some politician to crack down on people who embellish their resumes.

Still, the BIA episode revealed many standard elements of federal waste. According to the IG, the episode included:

A Politician Seeking Something: Then Senator Byron Dorgan (D-ND) pressured the BIA to hire more law enforcement officials.

An Incompetent Agency: The BIA contracted-out head-hunter activities to a group called the National Native American Law Enforcement Association (NNALEA). The IG says that the BIA “violated federal procurement regulations” a variety of ways, and it was clearly duped by the contractor. The NNALEA “capitalized on the bureau’s failures.”

A Contractor Doing Shoddy Work: The applications sent by the NNALEA to the BIA for the law enforcement jobs were of very poor quality. Of the 514 reviewed by the IG, for example, 104 simply didn’t meet the age requirements. All in all, “none” of the applications was of any use to the BIA.

A Lack of Personal Responsibility: NNALEA’s leaders generally refused to be interviewed by the IG regarding their failures. And because the IG’s new report came out a couple years after the events took place, the key BIA personnel responsible have moved on, including the then-head of the BIA, Larry Echohawk.

In sum, routine bureaucratic and political factors resulted in the BIA spending $1 million from which taxpayers and the intended recipients received “no benefit,” according to the IG. So no bathtubs on this one, just a run-of-the-mill Beltway boondoggle.

Since 2009 Greece has been at the epicenter of the euro crisis, and after last week’s parliamentary election, it looks like its departure from the common currency is a matter of weeks. Everyone agrees that Greece didn’t get into trouble because it spent too little, just the opposite. When George Papandreou became prime minister in October 2009, he found that his conservative predecessor had cooked the books and left him with a staggering fiscal deficit of 12.7% of GDP. The socialist Papandreou was then forced to shelve his promises of more handouts and implement a program of fiscal austerity in exchange for multi-billion bailouts from the European Union.

Two and a half years on, things look as bleak as ever for Greece, with an economy that is still shrinking and unemployment on the rise. Today, many people claim that, even though profligacy was the source of Greece’s problems, austerity is now making things worse by cutting spending too fast too soon. Time magazine’s Fareed Zakaria explained the dynamics yesterday in his CNN show GPS:

“The problem is that as these governments cut spending in very depressed economies, it has caused growth to slow even further – you see government workers who have been fired tend to buy fewer goods and services, for example – and all this means falling tax receipts and thus even bigger deficits.”

Zakaria is not the only one describing austerity as mostly spending cuts, and some pundits even dramatize the term by adding adjectives such as “deep,” “brutal,” “savage,” or “self-defeating.” Let’s look at how brutal these spending cuts have been in Greece:

Source: Source: European Commission, Economic and Financial Affairs.

Spending has declined to approximately its 2007 level in nominal terms, while in real terms it actually continues to go up. (I look at spending in real terms because that’s what Ryan Avent at The Economistsaid we should look at in a reply to Veronique de Rugy’s initial graph on austerity in Europe. Note that, as in my previous posts on Britain and France, I’m using the GDP deflator to calculate spending in real terms). If we look at spending in real terms, there haven’t been any spending cuts in Greece. On the other hand, Tyler Cowen observes that “in the short run it is supposedly nominal which matters (that said, gdp and population [and inflation] are not skyrocketing in these countries for the most part).” Let’s look at nominal then. Since 2000, public spending rose in Greece at an annual rate of 7.8% until 2009. Then it declined by 8.3% in 2010 and a further 4.1% in 2011. This is certainly a cut in spending, but far from brutal.

Some argue that we shouldn’t look at spending levels when talking about austerity, but rather at spending as a share of the economy. In that sense, government spending in Greece went up from 47.1% of GDP in 2000 to 53.8% in 2009 and it has come down to 50.3% in 2011—approximately its 2008 level. However, I don’t buy the argument. Does it mean that the government has to spend an ever increasing share of the GDP in order to keep the economy afloat? Is half of the economy not enough when it comes to government spending?

What about Zakaria’s argument of the crippling effect of firing government workers on growth? Last January, The Economistlooked at the situation in Greece and noted that “Of the 470,000 who have lost their jobs since 2008, not one came from the public sector. The civil service has had a 13.5% pay cut and some reductions in benefits, but no net job losses.” As for what “austerity” means for most Greeks, the magazine added, “Since Greece’s first bail-out in May 2010, the government has imposed austerity, increasing taxes so much that people can barely manage.”

The Economist is not alone in pointing out the extent to which taxes have gone up. Even the IMF has done so. Back in November, Poul Thomsen, the IMF mission chief in Greece, said that the country “has relied too much on taxes and I think one of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes.” Since then Greece agreed to eliminate 15,000 government jobs (2% of its public sector workforce) in exchange for a second bailout. Once again, that figure pales when compared to the number of people who have lost their jobs in the private sector.

The evidence shows that in Greece austerity has meant significant tax increases and timid spending cuts.